In Search Of The ‘Perfect’ Investment

December 07, 2017

Do you know what the “perfect” investment would look like? According to a chart in this article of returns for a hypothetical “Mystery Fund” with “perfect returns,”  it would have consistent, safe, growth. It turns out that this mystery fund is actually Bernie Madoff’s supposed “returns” to make the point that “if it’s too good to be true, it generally is.”

No such thing

In the real world, there is no investment that offers safe, consistent, high returns like that. Instead, there’s a tradeoff between safety/consistency and long term returns. The “perfect investment” along that spectrum depends largely on your time horizon.

Short term versus long term = different focus, different results

For short term goals, the focus should be on return of principal rather than return on principal. That’s because earning a higher rate of return won’t make a significant difference over just a few years, but a big loss may mean having to delay or underfund your goal. For longer term goals, losses are much more likely to be dwarfed by your gains.

For example, if you earn just 2% in a savings account for 3 years, $10k would only grow to about $10,600. Earning a 10% rate of return (the long term average in the stock market) would give you about $13k – not bad. However, a 40% loss (like in 2008) would leave you with under $8k.

On the other hand, earning 10% over 30 years would mean having over $174k (versus just $18k at a 2% return) and a 40% loss would still leave you with over $100k. While that 40% loss would still sting (and perhaps much more since you’re losing more money), you’d still end up with much more than you would have had with the safe 2% return. The longer your time horizon, the less likely you are to lose your principal.

Of course, this assumes you’re invested in a diversified mix of stocks. An individual stock can go all the way to zero. For that to happen to the stock market as a whole, we’d have to be in something like a nuclear war, an alien invasion, or a zombie apocalypse, in which case your investments are the least of your worries.

Do you really think that’s perfect?

There’s one other thing to keep in mind. I’m not so sure that most investors would actually see the mystery fund in the article as the perfect investment. After all, it trailed the S&P 500 from the mid-1990s to the early 2000s and from around 2006 to 2008. How many investors would have the patience to stick with that long a period of underperformance?

Most of the rest of the time, it simply tracked the market with only a couple of brief periods of outperformance so I’m not sure how many people would have even invested in it in the first place without hearing Madoff’s sales pitch.

Underperformance doesn’t mean unsuccessful

If you define success as consistently beating the market, you’ll never be satisfied. (Even Warren Buffett, arguably the most successful investor in history, has had long periods of underperformance.) You’ll find yourself chasing past performance, buying what’s high and selling when it’s low, which is pretty much the opposite of what you want to try to do.

Instead, you want to pick an investment strategy that matches your time frame and personal comfort with risk. Then stick with it! When it comes to investing, the “perfect” can truly be the enemy of the good.

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Your Obsession With Being Perfect Could Cost You Six Figures

December 06, 2017

As a recovering perfectionist, I feel slightly hypocritical even writing about this — perhaps I should title the post “How I’d Be Wealthier If I’d Gotten Over Perfectionism Sooner,” but either way, I need to call out something I’ve noticed more and more in my conversations with peers and colleagues who are 40 and younger. There’s an obsession with perfect that is getting in the way of a lot of things (read Brene Brown’s Gifts of Imperfection if you really want to get into it), but when it comes to money, it’s costing real dollars.

Perfect as a goal

There’s nothing wrong with striving for greatness in life, and that desire to get things “right” serves us well throughout our school years in terms of getting good grades and therefore better college and eventual career opportunities. But once we get into the “real world,” there are benchmarks we use to measure certain areas of personal finance that can mislead people who put “doing it right” ahead of all other criteria.

When it comes to your financial outlook, getting it perfect in the short term could actually lead to missed opportunities in the long-term. The worst part is that you probably won’t even know if you got it “wrong” until it’s too late. Here’s what I mean.

What is “right?”

The biggest issue here is that “right” is a moving target when it comes to things like investing, your credit score and even building a cash nest egg (also known as the emergency fund).

Investing

When it comes to investing, getting it “right” doesn’t actually mean you never experience a loss of value in your portfolio. If you make it through your entire career without once seeing your 401(k) balance drop, you actually got it wrong because it means you invested too conservatively and missed out on the greater growth that comes with greater risk.

It may feel better because you never had that pain of “loss,” but you’ll never actually know what you lost out on in missed opportunity. In fact, investing too conservatively over a 30 year career could literally cost you a half million or more.

When it comes to investing, there is no perfect, but generally speaking, the longer your time horizon, the more chance that taking risk will pay off. When the market drops, think of it as a buying opportunity — the cheaper you buy into your 401(k) and other investments, the better the long-term outcome. Even investing on the worst day in the market (aka going all-in the day the market peaks before an extended down period) leads to a better outcome than not investing at all — don’t wait.

Credit score

I like that people want to have a great credit score and it’s kind of cute how some of my more competitive colleagues compare scores all the time, but trying to get it perfect may actually hurt you in the long run. For example, I’ve talked with people who are hesitant to explore refinancing their debt or even apply for a mortgage because they were afraid of the “ding” from applying. What’s the point of having a great credit score if you’re not going to use it? Anything over 750 is enough, heck even 720 will be good enough to offer you great credit options. Obsess less about your score and more about these things.

Nest egg

When you’re first starting out, getting some cash in place to handle the things that come up in life like job losses, cat surgeries and car engines needing replacing (all true stories in my life) is super important. A great guideline to shoot for is 3 — 6 months of expenses, but as life goes on and hopefully cash flow becomes a little more … flow-y, it’s important to reassess that balance.

We can get to a point where we’re so used to putting cash in a savings account that we may be missing out on other opportunities for that money, whether it’s using it to increase HSA contributions, invest in something else or even pay down your mortgage faster. There is no perfect number that applies to everyone, actually. The amount you need in your nest egg depends on several things:

  • job security (the more secure your job or in-demand your skills are, the less likely you’ll face prolonged unemployment)
  • family situation (the more mouths you have the feed, the more you need)
  • housing situation (the person who could get out of a month-to-month lease and move in with mom and dad in an instant needs less than someone who owns an historic old home in a transitional neighborhood that might take several months to sell)
  • other sources of cash available (not that you want to use these things, but they can be a part of your emergency plan as time goes by)

If you find yourself the sole breadwinner with a spouse and 4 kids at home, you probably need up to a year’s worth of salary set aside, while a DINK couple (dual income, no kids) could get by with 3 months as long as they would be able to trim back on spending quite easily upon a job loss or accident.

Getting this one wrong on either side could cost you — have too little saved (perhaps because you were focused on spending money on making your house look perfect first?) and you could find yourself in serious debt or losing your home should something come up. Having too much in cash could cost you investing opportunities (see above). It’s best to re-evaluate how much you need at least every 5 years or so, and definitely when you have a big life event such as the birth of a child, significant increase in income, new home purchase or change in marital status.

Where you should try to get it perfect:

Avoiding high interest debt (or debt at all) — Interest, whether it’s tax deductible or not, is money wasted. The less you can spend on it, the easier it will be to achieve financial independence, which I view as having choices in life.

Minimizing taxes — I don’t mean spending money on mortgage interest to get a deduction, but making sure you’re taking full advantage of all tax savings opportunities. Some examples:

Choosing your life partner — You won’t find a perfect human and you can’t be perfect (sorry!), but you can find someone who’s perfect for you and that makes a huge difference in your long-term finances. My CEO Liz wrote about this in her book What Your Financial Advisor Isn’t Telling You and it’s true — who you marry could be your best or worst financial decision ever.

 

 

Does The Billboard Top 10 Mean The Market Is Heading For A Crash?

November 24, 2017

In my 20 years or so as a financial planner, I’ve heard some pretty wacky theories about things and events that allegedly have an influence on the stock market. They all have interesting and catchy names too like the “Santa Claus Rally,” the “January Effect,” or the “Super Bowl Indicator.” According to market folklore, each of these seemingly unrelated conditions or outcomes is supposed to determine the future direction of the U.S. stock market.

For example, according to the Super Bowl Indicator, a win by the American Football Conference (AFC) team is supposed to bode negatively for the stock market in the coming year, whereas a win by the National Football Conference (NFC) team is supposed to foretell a rising stock market for the next twelve months or so.

Balderdash! Correlation does not indicate causation. Everyone knows that, right? Entertaining as those correlations might be, there isn’t much (okay nothing) in the way of practical scientific support to back them up.

Can Billboard predict the next market crash?

However, some new research suggests yet another seemingly unrelated indicator that may actually have a hint of scientific support behind it. According to recent research conducted by Dr. Philip Maymin, then assistant professor of finance and risk engineering at NYU’s Polytechnic Institute, the public’s choice regarding popular music may indeed be closely tied to forecasted movement within the U.S. stock market.

Based upon Dr. Maymin’s findings, people tend to prefer softer, calmer musical beats when they anticipate a more volatile stock market in the coming months and faster, livelier music in anticipation of calmer markets. He based these findings on observations of variance in standard deviation of returns for the S&P 500 index in comparison to average annual beat variance in songs tracked by the Billboard Top 100.

Market timing – investing with two left feet

If making your investment decisions based upon who wins the Super Bowl or whether the song in your head sounds more like “Despacito” or a Mariah Carey tune comes across as a rather silly way to manage your money, you are probably right. Imagine trying to dance at a club or wedding where the DJ changes songs every few seconds. Investment choices based on changing market conditions can feel the same way.

Nevertheless, investors of all stripes frequently do engage in attempts to time the market based upon their thoughts, feelings, fears, hopes, dreams, etc. regarding a whole host of events, including election outcomes, the weather, how long the market has been up or down, chitchat among coworkers, and more.

Humans, it seems, are just not wired to handle uncertainty very well, and investment markets are the definition of uncertainty as they can be down one day and up the next. Much has been and continues to be written regarding human psychology and the uncertainty of investment markets.

Even market trend timing guru Paul Merriman applies mechanical market trend timing strategies to only half of his own investment portfolio, and he is adamant that timing in general is not suitable for the majority of individual investors. As Mr. Merriman and I tend to agree based upon our collective experience, most investors lack the psychological fortitude, discipline, and stamina to stick to a timing strategy during periods of short-term financial losses that will inevitably happen.

Why? The simple fact is we hate to lose money, and when we see values drop, we feel obligated to do something, even when the best course of action is often to do nothing. As a result, market timing doesn’t work and often serves to do nothing more than make a bad decision even worse.

Stick with the same old song

As with dieting, exercising, and balancing your checkbook, there are no reliable shortcuts to success with disciplined long-term investing. Diversify your investments appropriately across stocks, bonds, and cash. Buy and hold even when it feels wrong and continue to invest regardless of whether the market is up or down that day. Be mindful of fees and commissions.

It’s not sexy and it doesn’t make for riveting conversation in the lunch room or around the water cooler, but a consistent, disciplined approach to your investments will ultimately leave you humming a much happier tune.

This post was originally published on Forbes.

Investing 101: Understanding Your 401k Options

November 13, 2017

If you’re like a lot of people, even if you have gotten help choosing the investments in your 401k, you may not really understand how those investments work or what they are made up of. I felt that way for a long time.

Like fish in moving water

I still remember choosing investments for my first retirement plan, a 403b. I really had absolutely no idea what I was doing — even after studying for and taking various securities exams, I was still a little bit fuzzy on some things.

To me it was like looking at a fish swimming under moving water. You can kind of see it, but only in the most general terms. The variations in the color of its scales, or features of its fins are distorted so much that even though you know it’s a fish, you can’t tell much more than that. Likewise, you may know you’ve got an investment in your 401k, but, beyond that, who knows what’s in that thing!

Understanding some basic terms

To help de-mystify some of the terminology, I’d like to break down some different terms that you might come across. Here’s a basic idea of how it works:

Mutual Funds

A mutual fund is basket of investments in stocks and/or bonds that are chosen to meet a certain goal. Some mutual funds are professionally managed (often called “actively managed”) by a fund manager who buys and sells investments as she/he sees fit to earn the highest returns within certain parameters. The name of the fund will oftentimes tell you what is in it.

For example, a large cap mutual fund will hold stock in large companies. It may own stock in a few companies or in hundreds of companies. The fund manager gets to choose which stocks or bonds to buy in a mutual fund.

Index Funds

Index funds are a subset of mutual funds that are what we often call “passively managed” and the word “index” will usually be in the name of the fund. An index fund will typically be invested in all of the funds of a certain index, such as the S&P 500, Dow Jones, Russell 2000, etc. Indexes are made up of all of the available stocks or bonds that fall into a certain category. The most notable difference between index funds and actively managed funds is cost — index funds typically have much lower fees.

For example, the Russell 2000 Index tracks the stock of 2,000 small companies in the United States. Therefore, a Russell 2000 Index Fund would likely own stock in most of the 2000 companies represented in that index.

The idea behind investing in an index is that it provides very broad diversification within a certain category at a lower cost. This means that if something really bad or really good happens to one of the companies represented in the Russell 2000 index, it isn’t very likely to affect the overall index very much. If one of the companies goes bankrupt, you have the other 1999 companies to counteract that effect.

ETFs

ETF stands for Exchange Traded Fund and they are kind of like an index mutual fund in make up — the difference is how they are traded on the active market. With mutual funds (including index funds), when you request to buy or sell a fund, the trade is executed at the end of the trading day (4pm ET on days the market is open) so that is the price you get. ETFs, on the other hand, trade the moment you request a buy or sell transaction, so are often preferred by more active investors.

ETFs are typically also made up of stocks or bonds that fall into a certain category and are not actively managed — they are passively managed (like index funds). For example, there could also be a Russell 2000 ETF, and as long as a stock is part of the Russell 2000, it will be purchased and held as part of that ETF.

You are unlikely to have direct access to ETFs within your 401k or 403b account, but the funds that are available may use ETFs instead of individual stocks to achieve their investing objective.

Target Date Fund

A lot of plans are using these — sometimes they’re called “Target Retirement” or something similar, but the dead giveaway that they’re a Target Date fund is when there is a year in the title of the fund. The “target date” they are referring to is your retirement date (or the year closest to when you plan to start making withdrawals from your account).

Target Date funds are mutual funds (sometimes even called “fund of funds”) that are typically professionally managed to meet certain criteria so that the fund will be appropriate for someone with a specific time frame left before they will need to start withdrawing the money from their account. So, the closer you get to the targeted date, the more conservative the fund will become.

The idea here is that YOU don’t have to worry about selecting investments, the fund manager does all of that for you. But what is IN the account? A Target Date Fund will hold a variety of investments, usually other mutual funds or ETFs.

Target Date funds are basically a “set it and forget it” option for people who want to be hands-off but know that they are still giving their savings access to growth that’s appropriate for their timeline.

Stocks

Mutual funds are made up of a variety of different stocks (or bonds, if it’s a bond fund). Owning a share of stock simply means that you own a tiny percentage of a company.

Bonds

We’ve talked a lot about stocks but not so much about bonds. If you own a bond of a certain company, municipality or the federal government, it means that entity owes you money. They have borrowed from you and must pay you back with interest. Because they are an obligation versus just part ownership in a company that could go gangbusters or go bust, bonds are considered more conservative investments because you’re more likely to get your money back with interest and hopefully some growth. Bonds can also be held in a mutual fund or ETF.

 

So, there you have it: Target date funds hold mutual funds and ETFs, and mutual funds and ETFs hold stocks and bonds. Which essentially means that you may be invested in a target date fund or mutual funds and ETFs, but either way, somewhere under all of the layers, you are probably invested in individual stocks and bonds.

 

Even Jay-Z Has Investing Regrets — Why That’s Not Always A Bad Thing

November 09, 2017

“I could have bought a place in Dumbo before it was Dumbo for like 2 million. That same building today is worth 25 million. Guess how I’m feelin’?” — The Story of O.J., by Jay Z

Have you ever heard someone rave about their investment successes? They tell you how they got in that stock when it was worth nothing or how they sold out of the market just before the bottom fell out. It is easy to point to your successes in life, but I think failures teach the best lessons. Here Jay-Z gives us a glimpse of some of that pain. He speaks of an opportunity to buy a property in Brooklyn and passing on it. Now that property is worth more than 10 times what he would have paid for it.

Financial mistakes can be good for you

I am a strong believer that the lessons learned from financial mistakes are the best. You can be told a million times that it is a good idea to have a diversified portfolio but nothing gets your attention like going through a downturn with the wrong mix.

It definitely doesn’t feel good to lose like that, but if you can bear to examine those mistakes you will walk away with information that will put on the right side of opportunity the next time. Here is how to mine those investment mistakes to take away those gems of wisdom for future reference.

Making the most of money mishaps

Perform an autopsy on the mistake. Instead of kicking yourself over missing out on an opportunity or beating yourself up over buying something that did not perform, take a moment to think about what led you into that decision in the first place.

  • Was I being narrow minded or stubborn?
  • Were my priorities in a wrong place?
  • Did I not take the time to implement some basic rules into my investment decision?

My big investing lesson

When I look back on my own investment history, one big lesson I learned is that you cannot take advantage of an opportunity if you do not have the resources. I started in the financial planning business at end of the dot com boom. Coming out that recession I had a decent grasp on some of the brands that would thrive over the next decade because of my age.

What I didn’t have at the time was the savings to make truly meaningful moves on those opportunities. I was not in a financial crisis, but I was not prepared to sink capital into my own convictions. Because of that I missed on several great investment opportunities.

My lesson there was clear. I had to have my financial house together in order to take advantage of great opportunities when they come up.

Learning from others’ mistakes

While making your own mistakes is the most likely way to keep you from repeating them, there’s still value in examining what others, like Jay-Z, have to say about their own financial regrets. If you have a friend, a family member, or just someone you admire, ask them what lessons they have learned from their investment failures. I find the wisest people are the most gracious when sharing about this topic. They want others to know that success is not an easy road.

Warren Buffett, considered one of the greatest investors ever, essentially publishes his investment failures in his annual shareholder meeting. There are articles and podcasts dedicated to just that.

So now the secret is out: if you have made an investment mistake you are in very good company (assuming you consider Jay-Z and Warren Buffett to be good company!). The key is taking the lesson — your long term success is based on what you will do with your learnings.

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How I Learned To Lend Money To Family & Like It

October 13, 2017

In traditional financial planning circles, lending money to family is considered taboo. However, I must admit, I’ve bent the family finance rules a few times. Please don’t judge. After making some big mistakes (that you don’t have to make because you are wisely reading this blog), it’s actually worked out well for everyone. Here’s what happened.

Lending to family the first time: 3 big mistakes

A close relative of mine who had been living with me in the Rocky Mountains found a job opportunity in Las Vegas that was exactly what she needed to get her foot in the door. All she needed was a reliable car to get there and then to use while living there. Since she had no money, I agreed to sell her one of mine at less than market (because she is family) and we agreed she would make payments to me once she got settled.

Saying good-bye to my Trooper

So, that’s how my perfectly maintained, excellent condition 1992 Isuzu Trooper was soon never to be seen again. Long conclusion short – things hadn’t gone according to plan and my family member didn’t want me to know that the job hadn’t panned out the way she’d hoped. She had sold that awesome SUV for an absurdly low price to raise cash, keep her place, and continue her job search. She couldn’t bear to tell me and kept hoping she’d get a job and be able to start paying me back without my noticing too soon.

When I finally did find out, I felt soooo foolish. Every older person I knew had warned me never to lend to family or friends. I learned some valuable lessons:

Mistake #1 – Not assigning market value. The market is the market when it comes to anything, and if you end up with an asset for whatever reason, you want to make sure you’re not devaluing for no good reason. (even if it is family)

Lesson: Assign a realistic value to things.

Mistake #2 – Not formalizing the agreement. There’s a stereotype about rural folks whether they be from the mountains or the plains: Your handshake is as good as your word. While I’ll admit the stereotype is completely true (it’s still dangerous to go back on a handshake deal), you may be surprised to know that even where it’s recognized as official, it’s just a place holder until something formal is put in place. Without something in writing, the terms of any loan can get fuzzy and someone or everyone gets hurt.

Lesson: Put it in writing. As my father always said, “When you trust each other, neither of you has any problem putting it in writing.” When it comes to family, the formal agreement is arguably even more important than in traditional business. The repercussions are very long, after all.

Agree to sign a Promissory Note with your borrower (you can get a template online for free) and set up a payment schedule in the document. You can always make changes, but this ensures you are both on the same page with expectations (and should the deal go bad, you may even have a tax write-off).

Mistake #3 – Not insisting on insurance of some kind and letting her keep the title (presumably for automobile registration). If the family member doesn’t have the money for the transaction, how do you think they’re going to be able to pay you back if something goes wrong?

Lesson: Keep collateral. I should have held onto the title of the vehicle until my family member paid me back, and I certainly should have obtained a copy of the insurance policy to make sure my collateral could be replaced if something bad happened.

Lending to “family” the second time: a success story

My good friend, David, had been a great employee of mine in corporate America, and I supported him with advice and motivation when he chose to leave and figure out his true career path in music. David was in his late 20’s. He was single, owned a nice little condo, a cool jeep, and an adorable cat.

The time came when he needed to buy a new vehicle and clear his debts in order to keep pursuing his career in music (which was actually going well). It made sense for him to sell his condo — he could rent for less than his mortgage and the debt was limiting his credit. In the meantime, he needed some cash to tide him over — $30k to be exact.

Putting the deal together

He came to me with a formal proposal (in writing), basically saying that if I could lend him the $30k he needed to buy a new vehicle and clear all his other debts right now, then when the condo sold he would reimburse me, with interest. It was big chunk of change, but it all went according to plan because we solved all of the mistakes and he and I became partners in his condo sale.

Assigning value — David and I worked together to sell his condo. We were realistic about the market value and I knew that if the sale didn’t happen and I didn’t get my $30k cash back, the value was still there.

Putting it in writing — We signed a Promissory Note and I recorded a lien on the property at the county in case anything went wrong.

Keeping collateral — What if the condo sale hadn’t gone according to plan? If I had been a banking institution I would have pursued David for the remainder, foreclosed on the property, taken him to collections or court, you know the drill.

Since he is a friend (and adopted family), I instead had to be prepared to walk away with my losses and the condo as collateral. Since I’ve been a landlord since I was 22, I knew I could use the condo either as a sale or a rental to offset the worst-case scenario; and David and I could still look each other in the eye and smile at family gatherings.

The result

I broke even on the deal, and David went on to become my business partner for 12 successful years, and remains my closest, surrogate brother. I’ve since been able to assist family with other needs, including helping my brother open and sell a successful restaurant in Madrid, an experience that we all profited from.

Thanks in part to the things I’ve done right in family and friends lending, I’ve been able to revel in their successes more, and even have a part of ownership in a number of businesses and properties that I never would have considered on my own. The successes are great stories at family gatherings, and with the right pieces in place, the failures are a laugh and a bonding moment.

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Are You Betting Against Warren Buffett With Your Portfolio?

October 05, 2017

If you could get investment advice from anyone, who would it be? Well, you could do a lot worse than Warren Buffett, the second richest person in the world. For years, Buffett has been advising anyone who will listen, including Lebron James, to avoid high cost actively managed funds and stock to simple, low cost index funds.

With much of his advice ignored, Buffett decided to put his money where his mouth is and bet $1 million to charity that an S&P 500 Index fund would beat a group of any hedge funds over a 10 year period. (Hedge funds are supposed to be the “best of the best” on Wall St. and are generally only available to wealthy individuals and institutions.) After a period of silence, Buffett finally found someone willing to take up his challenge. The 10 year period expires at the end of the year but Buffett’s opponent has already conceded since the S&P is considerably ahead of the hedge funds.

What can the rest of us learn from this?

  1. Keep an eye on costs when choosing mutual funds. The primary reason the hedge funds lost was their high fees. A study by Morningstar similarly found that the “most proven predictor of future fund returns” when comparing similar mutual funds was a low expense ratio, which is the main fee charged by mutual funds. Buffett chose an index fund since they tend to have much lower fees and trading costs than actively managed funds. In a taxable account, they also tend to be more tax-efficient. If you don’t have index funds available to you in your retirement plan, compare funds’ expense ratios and turnover ratios (how often a fund trades and this generates transaction costs).
  2. Have a long term perspective. Despite the odds being in his favor, Buffett knew better than to take a bet on a single year’s performance. He used ten years to reduce the impact of random luck. Don’t get caught up in short term performance. Just because a fund is outperforming for a period of time, doesn’t mean it will continue to do so. In fact, research has found that the longer the time period, the less likely top funds can maintain their outperformance, implying that it was more due to luck than skill.
  3. Be willing to take calculated risks. Buffett knew the odds, but it wouldn’t have meant anything if he wasn’t willing to take a bet on them. Remember, knowing is only half the battle. Don’t let analysis paralysis or procrastination prevent you from acting. If you’re afraid of investing, start with a more conservative fund that also includes bonds and cash as well as stocks.

In retrospect, betting against Buffett may seem like a foolish bet to have made. But keep in mind that when you choose more expensive, actively managed funds, you’re essentially betting against Buffett too with your own money. Is that really a bet you want to take?

 

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When It Comes To Financial Planning, Listen To Joe Maddon: Do Simple Better

October 02, 2017

It’s that time of year – Major League Baseball playoffs are scheduled to start later this week and the city of Chicago (myself included) is starting to get worked up about the possibility of our beloved Cubbies repeating as World Series Champions. It has me thinking about one of Joe Maddon‘s famous phrases.

If you are a fan of baseball, you probably know that Joe is the Cubs’ manager, but if you are not familiar with Joe, that’s OK – just stay with me here. Joe is a quirky guy — he brings exotic animals into the team’s club house and has the players dress in pajamas when going on long road trips.

Despite all his shenanigans, there is one thing about Joe that has always stuck out to me. One of the phrases that Joe consistently uses to keep his players in the right frame of mind is, “Do Simple Better.” Think about that — he is working with the best ball players in the world and his message to them is not “take more batting practice” or “watch out for the curve ball on a 1-2 pitch,” but rather to focus on the basics.

It turns out this philosophy can also help you improve your financial well-being. Here’s how.

Saving

Do simple: Establish your savings goals by writing them down and putting a plan in place to save for them each month. Whether it’s saving for emergencies, college, vacations or retirement, if you have a written plan on how to get there, chances are much better that you will make it.

Do simple better: Set up a different savings account for each goal, and have money automatically transferred each month from your checking account or paycheck to these accounts. You may be thinking that you are already doing this with your 401(k) by having a certain percentage deducted from each paycheck – that’s awesome, but consider taking it a step further and enrolling in your plan’s automatic rate escalator.

Investing

Do simple: One thing that all great investors have in common is that they have a grasp on the fundamentals. To apply that to your investment strategy, determine what your time horizon and tolerance for risk are for each goal. From there you can choose the appropriate asset allocation, or mix of cash to stocks to bonds. Studies have shown that asset allocation has a larger effect on investment return than any other variable.

Do simple better: Take this risk tolerance quiz to identify your ideal asset allocation for different savings goals. Then, invest accordingly. Also, rebalance your investments at least once per year. This will keep you in line with your initial allocation strategy and force you to buy low and sell high!

Communicating

Do simple: If your finances are intertwined with a spouse or partner, consider improving your communication by having regular meetings to discuss your finances. This is not a “finger pointing” session, but rather a time to ensure the left hand knows what the right is doing. My wife and I have recently made it a point to sit down every two weeks to review our finances, and it has relieved a good deal of financial stress.

Do simple better: Hold this meeting at a time when you are both relaxed and not preoccupied with anything else. We do ours on Sunday evenings, when it’s quiet and we’re not worried about getting to work or taking the kids to their activities. Also, make the meeting enjoyable – perhaps bring a bottle of wine to the table!

One more thing – hold each other accountable during the meeting. For months, if not years, my wife and I have “discussed” calling our cell phone provider to see if we could save some money with more efficient plan. With the nudge of our bi-weekly meeting, we finally did it, and are now saving over $1,000 a year!

Take Action

This is what it’s all about. On paper, the ability to save, invest and communicate seems, well, simple. It’s up to you to set up those automatic transfers, invest per your risk tolerance and meet with your accountability partner. You will then understand the power of “doing simple better!”

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Why Acorns Can’t Replace A Financial Plan

August 24, 2017

It’s always good to hear about different ways of saving money so I was intrigued by this recent Forbes post about how one of my colleagues uses an app called Acorns to save more by making it a game. The app rounds up your linked debit and credit card purchases to the nearest dollar and then invests the difference in a mix of ETFs. Partners can also contribute cash rewards from purchases to your accounts.

The main advantage of Acorns is that it makes saving and investing really easy. Beyond setting up your account and linking your cards, there really isn’t anything else to do. However, there are a few drawbacks to be aware of:

  1. Complacency. My biggest fear is that people would use this as a substitute rather than a supplement to making sure they’re saving enough to hit their goals. The reality is that rounding up your purchases is unlikely to be enough. You’ll still want to calculate how much to save for both long term goals like retirement and shorter term goals like an emergency fund, buying a home, or going on vacation.
  2. Taxes. Once you know how much to save, the next question is where to put it. For goals like retirement, there are significant tax benefits for contributing to your employer’s retirement plan (plus possibly free money in the form of a match), an HSA, and an IRA. Acorns only allows you to contribute to regular taxable accounts.
  3. Risk. Of course, regular taxable accounts are fine for short term goals where you don’t want to be subject to an early withdrawal penalty. The problem here is that any money you might use in the next few years should be someplace safe like a savings account or money market fund. The type of investments that Acorns uses are just too risky for such a short time frame. You could see a good portion of your savings wiped out if you need the money while the market is down.
  4. Fees. While the fees are pretty low for small accounts, their .25% fee on balances over $25k will start adding up as your account balance grows over time. After all, this is how they intend to make money. The problem is that you can purchase essentially those same investments in a brokerage firm without that additional cost.

Fortunately, you can get a lot of the same benefit of using Acorns by simply automating your saving and investing. After calculating how much to save, have that amount deducted from your paycheck or automatically transferred from your bank account to a separate account.

You can then have your savings money automatically invested in a low cost diversified portfolio that matches your time frame and risk tolerance. It may not be as fun as using the app, but it’s definitely more fun to hit your goals than to find out that you haven’t saved enough, paid too much in taxes, or saw your savings decimated by the market in the short run or by fees in the long run.

Does this mean there’s no place for apps like Acorns? Not necessarily. It can be a great way to start a good habit or supplement your other savings, especially if you shop a lot at one of their partners and can collect a lot of “found money.” Just don’t expect it to replace a real financial plan.

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How To Invest Like A Shark

August 18, 2017

Are you a fan of Shark Tank? It’s must-watch TV in my household — we love the creativity of the business pitches and the investment insights of the sharks. One of the realizations I’ve had while watching is that much of the interaction between the sharks and the business owners is about one simple thing: What is the business and does it make money? Here’s how that insight can translate into making your own investment decisions.

Ask the following questions

How much does it cost for me to invest in this? The biggest point of contention on Shark Tank is the dollar amount at which to invest. Every investment opportunity has some cost. The question you should be asking is what value are you getting for the cost and is there any other type of investment that could give you better value for that cost? When comparing investments, it helps to have a third-party resource that can give you reliable information. A couple of resources I like to use are Morningstar and Yahoo! Finance.

How is this better than what I am currently doing? In many cases the sharks will turn down an opportunity if the potential income is not more than what they could earn on their own. If you are considering making a shift in what you are investing in, first do some research to determine what you could earn after fees. For instance, if you are considering whether to rollover your 401(k) to an IRA with a financial advisor, be sure to compare the returns of your current plan to whatever an advisor may recommend.

Is it simple? You’ll notice the pitches on Shark Tank are no more than a couple of minutes long. The sharks may ask a few follow-up questions but the investment concept must be relatively easy to understand. If you cannot get the basic idea of how the investment makes you money in a few minutes, then it may not be the best investment at that point.

I have had the opportunity to witness how investing concepts play out over long periods of time and anecdotally, simple beats complex. It’s not just me, there is some great research on this topic out there. When an investment is simple, it is easy to remember why you made the decision to invest in the first place. That can make it easier to stay invested for the long-run.

Do not be intimidated if you are struggling to make sense of an investment. If whoever is selling you the investment opportunity cannot explain to you in simple terms how it works at a level that is comfortable for you it makes sense to follow Warren Buffett’s advice: never invest in a business you cannot understand.

Swimming with the sharks

You may not have the resources or business experience that the sharks have, but by answering these three questions, you will definitely be swimming in the right tank.

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What To Do If You’re Worried About North Korean Nukes

August 17, 2017

I recently had someone ask me about what the effect could be on their investment portfolio and what they should do about it should North Korea actually launch a nuclear missile. We’ll get to that, but the reality is that your investments will likely be the last of your worries.

However, there are some things to do to prepare for a nuclear attack that may not only help bring some peace of mind during uncertain geopolitical times, but could also help you should other disasters strike such as a job loss or weather-related event.

1) Know what to do if you’re in the vicinity of a nuclear blast.

The Department of Homeland Security has a quick summary of what to do. Study them and consider taking first aid classes from your local Red Cross. Those skills can come in handy in a variety of emergencies. We change lives at Financial Finesse but this can actually save them.

2) Build an emergency kit.

You don’t have to be a crazy survivalist living in a mountain cabin to see the value of an emergency kit with tools, first aid supplies, and enough food and water to last at least 3 days. In fact, that’s what’s officially recommended by FEMA and the NY Times. A basic kit can be purchased for less than $100 from the American Red Cross or you can put one together for even less, especially if you already own many of the components.

3) Stash some cash.

In an emergency, cash is truly king. No matter how adequate your emergency supplies are, you never know what you may need to purchase from someone else after a disaster. After a nuclear attack, banks may be closed, ATMs may not be working, and money market funds may not be available if the stock market is suspended as it was after 9/11. That’s why you’ll want to keep at least few hundred dollars in physical cash (yes, even if it’s under your actual mattress). Some people hoard gold coins for this reason but will the people you want to buy from know how to value them? I’d stick with cash.

4) Have an emergency food reserve.

If the emergency lasts past 3 days, you’ll still want to be able to eat. Consider having enough food to last at least a couple of weeks. The nice thing about food (as opposed to say, gold) is that it’s something you know you’ll need and can benefit from even if no emergency ever happens.

First of all, you can save a lot of money by buying non-perishable food in bulk. You would then simply replace items as you use them and perhaps add items while they’re on sale. Storing food you eat anyway also ensures that you won’t be making a big change in your diet during an already stressful time.

Second, a food reserve can also be part of your regular emergency fund and reduce the amount of savings you need. After all, you can eat it if you’re unemployed too. Sure, you would miss out on the less than ½ of a percent (minus taxes) you’d otherwise be earning with that money in your savings account. But according to the most recent CPI release, the inflation rate of food over the last 12 months ending at the end of June was about 1.6% so you’d actually be saving more than what you likely would have earned keeping that money in the bank.

5) Make sure your portfolio is diversified.

If we do get attacked, once the initial shock has worn off, you’ll eventually notice that your portfolio will most likely be decimated. This is why it’s important to be diversified in assets like international stocks, government bonds, and possibly alternative investments like gold that may not be as adversely affected or may even benefit from a crisis. You can use this asset allocation guide based on your risk tolerance, follow one of these model portfolios, or simply invest in a “one stop shop” asset allocation fund. Just be sure that this is part of your overall long term investment strategy — don’t change your investments every time North Korea makes a threat or the President tweets one or you’ll likely decimate it on your own.

Hopefully, you’ll never need any of this. In the best case scenario, having a plan will simply provide some peace of mind. In the worst case, better safe than sorry!

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Why You Shouldn’t Worry About Investing at the Top

August 03, 2017

Have you been seeing a lot of news articles lately about how the US stock market is overpriced and due for a decline soon? Of course, correctly timing the market is notoriously difficult. Not only do you have to know when to get out, you also need to know when to get back in. But what if the prognosticators are right and you’re unlucky enough to invest at the very peak of the market?

Getting it totally wrong

This article looked at what would have happened if a hypothetical investor had invested at all the wrong times over the last few decades: 1973 before a 48% decline in the S&P 500, September of 1987 just before a 34% crash, and then right before the 2000 and 2007 bubbles burst. Sounds pretty dismal, huh? It turns out that our spectacularly awful investor still would have earned a 9% average annualized return! That’s because they never sold and held the stocks until the eventual recoveries. So what can we learn from this?

You’re in it for the long haul

First, only invest if you can keep the money invested for the long run, ideally at least 5 years. Otherwise, you risk needing the money when your investments are down in value and you’re forced to sell at a loss. Any money you need in the next few years should stay someplace safe like a savings account instead.

Don’t put all your eggs in one basket

Second, be diversified. These results were based on investing in the stock market as a whole. An individual stock can go all the way to zero and never recover. It would take essentially the end of the world for that to happen to the entire stock market. In that case, your investments will be the least of your worries.

Ride out the storms

Finally, don’t sell during downturns. Stock market declines are inevitable and generally happen every few years. The key is to not let them affect your long term investment plan. Try to ignore them or even better, consider re-balancing your portfolio to make the declines actually work in your favor.

Take the plunge

This is another reason why I love investing. You can have the worst luck in the world and still come out doing pretty well. The key is to have patience. As they say, it’s time in the market, not timing the market that matters. So if you’re waiting for a market dip to get in, you could be wasting your time. Just do it!

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The Hidden Secret To Finding The Best Mutual Funds

July 31, 2017

How do you evaluate the tsunami of information you find when you’re trying to pick the best mutual fund for your portfolio? Even if you’ve narrowed down your choice so you know what type of fund (index fund vs. actively managed, large cap vs. small cap, growth vs. value, etc.) there are still hundreds of choices available.

Should you pick the fund that did the best last year, or over the past ten years? My colleague Kelley addressed this already and the answer is a firm no. When my financial planner calls me to recommend a fund, she does this all the time and it drives me bananas. I tell her that’s like looking in the rear view mirror while you are driving.

There’s a better way to evaluate. The key is to look for one simple number, the Sharpe Ratio.

How much return would you have gotten for the risk you took?

The higher a fund’s Sharpe ratio, the better the fund did, adjusted for risk. And by risk, I mean the risk that the price could fall (you won’t care if the fund goes up more than expected, right?) The Sharpe Ratio tells whether the fund manager makes wise decisions  – what to buy, how much of it, and when to sell it – and how much risk they were willing to take with someone else’s money. Did they bet the farm on a few stocks, risk a lot and get lucky (or not), or did they have good returns without too much risk?

You can use the Sharpe Ratio of an index fund in that fund category to see what the average risk is, then compare. For example, if the 10 year Sharpe Ratio of the index is .54, but an actively managed fund in same category for the same period is .78, you’ll know the fund may worth considering. If another fund in that same category only has a Sharpe Ratio of .15, for example, you should walk away from it. Keep in mind that most actively managed funds do not beat an index fund consistently over time (if you’re into math, see here for the research), so this is a simple way to separate the better ones.

Make sure it’s calculated net of fees

You have to compare apples to apples. It doesn’t help much if an actively managed fund beat the index by 1.5 percent if the fees are also 1.5 percent. Make sure the fund’s Sharpe Ratio is after fees, not before.

Where to find the Sharpe Ratio

The Sharpe Ratio is easy to find on most mutual fund ratings, such as Morningstar and Lipper (if you have a brokerage account, you may be able to download longer Lipper profiles there). You can also generally find it in the fund’s prospectus, although you’ll have to dig through a lot of legalese to get there.

In my opinion, after decades as an investment adviser, the Sharpe Ratio is by far the best measure of a mutual fund when you’re trying to choose among several with similar objectives. All the other stuff is generally just fluff.

 

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How To Read The “Warning Label” Of Annuity Products

July 28, 2017

I love silly articles that I see on social media sites, and my kids and I love to look at warning labels for things that make us laugh. This article combines both of these highly entertaining things that I like. Since most warning labels are in existence because of someone actually doing the things that are being warned against, I always want to meet these people.

As entertaining as I find wacky warning labels, not all warning labels are intended to be funny. And actually, not all warning labels are actually warning labels, either. Some come disguised as sales literature for financial products.

Buyer beware

Case in point: I recently met with someone who had a 401(k) account from a prior employer, and her financial advisor had recommended that she roll it over into an equity index annuity with him. She had not decided whether or not to purchase the annuity before our conversation, thankfully. During our meeting, we looked at the “warning label” (aka the fee disclosures) for the proposed annuity to see if it was a good deal. Here’s what we found:

  •  10 year “surrender charge” — this means that if she wanted to get out of the annuity for any reason, including to change investments, advisors, or for poor performance, etc. in the next 10 years, she would have to pay a hefty fee to do so;
  • “Mortality & expense” fees — this is the insurance component, along with the sales charges (aka what the advisor would be paid,) and administrative fees;
  • “Management” fees — this was the investment component, which was in excess of 2.5% per year.

Finally, the track record of the investments inside the annuity was less than stellar, so she could potentially be paying 2.5% to actually lose money. If I could write a warning label for this annuity, I might have it say something like, “Product contains excessive fees,” or “Warning: your advisor might make more money on this than you do.”

After reviewing all of this information, she obviously decided to opt out of the annuity and transfer her prior account to her current employer’s 401(k) instead — knowing that her 401(k) had much lower fees combined with the ability to make changes to the investments without penalties, I think she made the right choice. The annuity’s “warning label” gave enough information about the product to make her consider another alternative.

Know what to look for

The lesson here is that investment products don’t come with explicit warning labels like hair dryers or plastic bags, but the language is there if you know where to look. Before you make any significant financial commitments, be sure that you fully understand the fine print on the warning labels, even if it’s not labeled as a warning.

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The Best Financial Decision Isn’t Always the Most Obvious One

July 27, 2017

Let’s suppose you have sufficient emergency savings and are maxing the match in your 401(k). You now have several options of what to do with your extra savings. One is to pay down a student loan with a 3.7% interest rate, the second is to invest more for retirement, and the third is to pay down a mortgage with 3.85% interest rate (2.81% after factoring in the tax deduction). Which would you choose? This is the real life scenario of an employee I recently spoke with, so let’s explore the options.

Option 1: Pay down 3.7% student loan

Her initial instinct was to pay down the student loan because it annoyed her the most and she was worried about having that debt if she were to lose her job. But making payments towards the debt wouldn’t actually make her more financially secure until it was completely paid off. In the meantime, she would actually be safer having more in savings and investments that she could use to make the loan payments in case she found herself in between jobs.

Option 2: Invest more toward retirement

She could reasonably expect to earn more by investing her savings than she would save in interest by paying down the loan early, as long as she invested for longer-term growth and wasn’t too conservative. (My general rule of thumb is to pay off debt first if the interest rate is 6% or more, invest if the interest rate is below 4%, and go either way depending on how aggressive an investor you are if the interest rate is between 4-6%.) Of course, she could still decide to pay the student loans for emotional reasons, but investing would likely give her a better return on her money.

Option 3: Pay down 3.85% mortgage

In the end, we decided that it actually made the most sense for her to pay her mortgage down. At first, that didn’t seem to make sense since the mortgage interest rate is even lower than the student loan after the tax deduction. (Her income is too high to deduct the student loan interest from her taxes.)

However, it turned out that she had to pay PMI (private mortgage insurance) until she had 20% equity in her home. When we calculated how much she would save each year in PMI payments as a percentage of the mortgage balance she’d have to pay down, it was 6%. When you add that to the 2.81% interest rate, she would save a guaranteed 8.81% on the money she put towards getting that 20% in equity!

The moral of the story

When deciding between alternative options, first figure out what the expected return on your money would be, either in savings by paying down debt or earnings from investments, but be sure to factor in ALL the possible savings and earnings. (A qualified financial planner can help you do this so long as they aren’t biased towards one choice or another.) Finally, don’t forget the “happiness factor.” If, after looking at the numbers, she decided that paying off the student loan would make her happier overall, that’s fine too…as long as it’s an informed decision.

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The Real Reason Your Stock Picks Are Wrong

July 13, 2017

It’s common knowledge that in the long run, stocks outperform treasury bills, which are short term loans to the federal government that can be considered a relatively risk-free form of cash. But according to a new study by Hendrik Bessembinder of Arizona State University, a majority of stocks in the CSRP database underperform treasury bills over both one-month and lifetime returns from 1926-2015. In fact, almost all the returns of the stock market come from just the top 4% of stocks! So what does this mean for you?

  1. Picking individual stocks is basically gambling. The odds are simply heavily stacked against you. If you want to “invest” a small amount of money in individual stocks in the hope of outsized returns, go for it. (I actually do this myself.) Just make sure it’s money you can afford to lose and not your retirement nest egg or college fund.
  2. Put your eggs in lots of baskets. It’s not just to avoid the big losers. It’s also to make sure you get the big winners too. For most people, this means investing in mutual funds or ETFs since it’s generally more difficult and expensive to buy enough individual stocks to be adequately diversified.
  3. Be careful of active management. Considering how slim the odds are of picking that 4% of stocks, it’s no wonder that the vast majority of active money managers underperform. They either have to take the risk of missing that 4% and drastically underperforming the market (hence putting their careers in jeopardy) or more likely, they create “closet index funds” that mostly buy the entire market but still end up underperforming (albeit less drastically) due to fees and transaction costs. You can avoid these problems by simply investing in a diversified portfolio of low cost index funds. This way, you know you’ll have that 4%.

None of this means you should abandon stocks for treasury bills. Let’s not lose sight of the big picture here. A dollar invested in US stocks in 1926 was worth $448 in real inflation-adjusted dollars at the end of last year while a dollar in treasury bills was only worth $1.53, barely staying ahead of inflation. If you want your money to grow (and you probably need some growth to hit your long term investing goals), stocks are still where the action is. We just don’t know which ones yet.

 

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The Best Financial Advice I’ve Ever Heard

July 06, 2017

That’s how the advice was characterized in the title of an article I read recently and it actually lived up to its name. After a five year study, the author found that there are two main ways to wealth for self-made millionaires (not including inheritance, marriage, or winning the lottery):

  1. Pursue a dream.
    OR
  2. Live below your means and invest your savings over a long period of time.

Option 1: Pursuing a Dream

I’m often irked when I hear successful entrepreneurs and celebrities advocating the first path. The problem is that it requires both a lot of sacrifice and a lot of risk to achieve a dream. We see the outcomes, but we don’t often see the sacrifice or the risk. Hearing about countless hours of hard work isn’t as exciting, and no one listens to all the people who took the risk of dropping out of college and giving up on a safe career only to fail at acting or whatever else their passion was.

It’s not that this is necessarily a bad choice. Some people who pursue their dream do succeed. Just be aware of the sacrifices and risks you’ll have to take.

But it’s not always an either/or. One option might be to first try to achieve some level of financial security and independence first. For example, Arnold Schwarzenegger first made millions of dollars by selling fitness equipment and investing in real estate before he embarked on his acting career. He didn’t want to be like other aspiring actors he saw that struggled financially and were forced to take sub-par roles to pay the bills.

Option 2: Living Below Your Means

Since most people don’t have the desire to make the sacrifices and take the risks required to pursue a dream, the article’s author found that 83% of the self-made millionaires he studied became rich simply by living a very frugal lifestyle. (boring, I know) This is a path that doesn’t require immense talent, effort, or luck. The main obstacle is “lifestyle creep” or the tendency of people to automatically increase their standard of living as their income rises. As a result, many of them never get much beyond living paycheck to paycheck.

So what’s the secret? The article says the key is to maintain the “same house, same spouse, and same car” as long as possible. After all, houses and cars are two of the biggest expenses Americans have and anyone who has gone through a divorce can tell you it can be quite costly as well.

One advantage I’ve found of minimizing high fixed costs like homes and cars is that it leaves me more money not just for savings, but also for discretionary expenses like dining out, shopping, travel and entertainment. This gives you a certain level of financial freedom in your everyday life that makes you feel less constrained. Research has shown that spending money on experiences can particularly lead to happiness.

In contrast, buying a new home or car can typically only give you a temporary boost in happiness before you get used to it and need to upgrade again to get the same high. In the meantime, having less money to spend day-to-day can make you feel depressed and constrained. It’s kind of like going on a diet vs finding a way to eliminate a bunch of calories everyday so you can eat more of what you want.

So if you want to stop living paycheck to paycheck and become financially independent, you have two choices. You can either make the sacrifices and take the risks necessary to pursue a dream or you can stick to the same house, spouse, and car as long as possible. The second may not sound as exciting but as they say, slow and steady wins the race.

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How To Protect Yourself In Case You Lose Your Pension

June 30, 2017

Over the last few months I have talked to a lot of people who are concerned that their company’s pension plan has changed for the worse, and I have a hunch the next few months will see more of the same. The state of Michigan is considering a complete overhaul to their teacher pension plan, placing the majority of the retirement savings burden on teachers, a trend I see only increasing as state and local governments face budget woes.

These are people from many different employers all across the country. Many others have seen an employer’s pension plan get frozen, terminated, or taken over by the PBGC. What was just a generation ago almost a “given” has become increasingly rare, and even when it exists there is ever increasing skepticism about the long term viability of the pension plan.

What can be done?

  1. If you have a pension…be thankful.
  2. Then, be prepared to see it change between now and retirement (even if you are retiring in the near term).
  3. Most importantly, take control of your financial life & get yourself in a position where no matter what actions your employer takes regarding the pension plan, you can retire comfortably.

OK, that sounds like reasonable advice, but how do you do that?

How to take control

In order to do it yourself, here are two things that will help you prepare:

Have a plan! Aka, think big picture.

  • Understand when you want to retire, how much you’ll spend, how much income you will have, and the financial resources available to you. (Get help from a financial planner if needed)
  • Run a retirement calculator to get a sense of where you are tracking toward your long term goals.  Determine how much you need to save between now & then.

Dig in to the details. This only takes a few minutes, so don’t be intimidated. But do make the time.

  • Understand your current budget and where your money goes. Where can you save more?  Where can you spend less?
  • Make sure your investment dollars are invested for optimal growth without too much risk. Do you have the right mix of stocks, bonds, cash and other assets?

When you have a fairly clear vision for your future, you can take actions that will help you reach your goals without feeling like you’re leaving your employer in control. Start with your big picture, dig into the details, and take control of your financial life. If your company pension goes away, gets frozen, gets taken over by the PBGC, or just never existed in the first place – it won’t matter because you will have prepared yourself for the future with or without your pension.

 

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How To Find A Financial Planner That’s On Your Side

June 22, 2017

A friend of mine recently asked me what I thought of the new Department of Labor’s rule last week that requires financial advisors for IRAs and qualified retirement accounts to act as fiduciaries in their clients’ best interest. I personally felt a little conflicted.

The issue

On one hand, it can reduce a lot of the conflicts of interest that plague the financial advisory world. Before the requirement, advisors essentially had a choice over whether to be regulated as investment advisors subject to the fiduciary rule or as brokers subject to the much looser “suitability standard.” Many of the latter recommend high-fee funds that pay them large commissions, despite the fact that low fees have been found to be most consistent predictor of superior performance.

On the other hand, it will likely have some unintended and harmful consequences. Since advisors subject to a fiduciary standard tend to charge asset management fees, they often require you to have a minimum account balance to work with them. These fees can also cost more than the commissions in the long run.

At Financial Finesse, none of this has ever been an issue. We don’t charge fees or sell anything at all and make absolutely no money based on what we tell people. Because our services are paid for by employers, they are free to the people we work with and open to anyone, regardless of income or net worth. This opportunity to help people who really need it rather than sell things they may not need is why many of us chose to work here. Many even took a significant pay cut.

How to find a planner outside of the workplace

What if you don’t have access to an unbiased workplace financial wellness provider like Financial Finesse through your employer? Looking for a financial planner who will act in your best interest goes beyond just what’s required by the new rule. Here’s a process to follow that’s similar to the one we use to hire our planners:

First, find out how they’re compensated. Do they accept commissions based on their recommendations? If they charge an asset-based fee, do you meet their minimum account size? Consider advisors that charge an annual, monthly, or hourly fee as this presents the least conflicts and typically costs less when you do the math.

Second, good intentions aren’t everything. Make sure they have the skills to act in your best interest too. Look for planners with at least 10 years of experience and who have widely respected professional designations like the CFP®, ChFC, and CPA/PFS. Many other “credentials” are really just marketing gimmicks that can be purchased online.

Once you’ve narrowed your search a bit, do your homework. Review their disciplinary history here. Interview at least three to see who you personally feel comfortable with. Otherwise, you may find yourself not consulting them or taking their advice. Finally, ask for references of clients similar to you.

Of course, this process doesn’t guarantee that your planner will always act in your best interest. Stay vigilant and don’t be afraid to fire your planner if necessary. Remember that the person who cares most about your financial well-being and is ultimately responsible for it, is you.

 

Here at Financial Finesse, we believe strongly in the importance of workplace culture and the power of doing well by doing good. This article is the fourth in our week-long series of posts where we highlight a specific part of our company culture that helps to make Financial Finesse one of America’s best places to work. This is just one part of our celebration of recent recognition by Inc., who listed us as one of the Best Workplaces in 2017 and Entrepreneur, who named us to the Small-Sized Companies: The Best Company Cultures in 2017 list.

Use This Hack to Figure Out How to Invest

June 07, 2017

If I could wave a magic wand and impart knowledge to anyone who thinks they have to be an investing expert in order to make money in the stock market, I would make sure that everyone knows that you don’t have to even be interested in investing in order to do it well. People who want to talk stock tips are often disappointed when they bring that subject up with me – I have relatively zero interest in the market. Yes, I’m a CFP® and no, I don’t like to choose investments.

I understand how to do it quite well, and really enjoy helping others learn what they need to know, but I don’t waste my time worrying about whether the next bear market will happen this year or next. I am quite certain there will be quite a few bear markets between now and retirement, but as a long-term investor, I don’t particularly care when they’ll happen or how long they’ll last, and neither should you. To me, a bear market is like the semi-annual sale at Athleta – a great time to stock up!

An easy investing hack

If you’re like me, and really just want to make sure you’re taking advantage of the overall long-term growth potential that investing in the stock market offers without having to analyze mutual fund ratings, asset allocation models or stock charts (nothing against those who do – more power to you and I wish you much investing success!), then this hack is for you.

Stocks and bonds and asset allocation, oh my

One of the most confusing parts about investing is figuring out what percentage to invest in stocks versus bonds, not to mention dividing the stock portion up among different market segments like large cap, mid cap, international, etc. (JARGON ALERT!)  When I first got into financial planning, I was totally stumped about how to do this. Was there some magic formula that only really smart market gurus could come up with? I knew that there were financial advisors who very confidently presented custom mixes to clients, but where did they get this information? Did I have to work for one of the big investment banks in order to have access to this information for my clients?

Then one day, I discovered the answer. It’s not some secret formula and it isn’t rocket science. You don’t have to know the first thing about what the market is going to do tomorrow or even worry if it’s up or down or going sideways. All you have to do is copy the mix of a Target Date Fund (also sometimes called Target Retirement Funds or Freedom Funds, depending on the investment company that runs them) with the date closest to your retirement year.

How it works

The easiest way to find the mix of a Target Date Fund is to look at the information for the fund, which is often found on the Fund Fact Sheet or you can just look one up on the website of companies like Fidelity, Charles Schwab, Vanguard, etc. You can typically find a pie chart that tells you the percentage of the fund that’s invested in different parts of the market, and then literally copy that percentage using index funds into your own account.

Imitation = flattery = easy investing

The advantage over using the Target Date Fund itself

Why not just buy the Target Date Fund itself, you may be wondering? One of the common criticisms of Target Date Funds is cost – because they require a little more attention than a standard index fund, they typically cost a little more. So, it’s mostly just to save money on fees, although this strategy would also work for someone who has a 401(k) that doesn’t offer Target Date Funds (admittedly, this is becoming less and less common, but check those fees!). It’s kind of like going to a craft show to scope out the cute DIY goods then going home and copying everything you saw that you liked, rather than buying the finished product at the marked-up price.

This hack is also perfect for someone who wants to be a little bit more hands-on, but is still learning the ins and outs of investing. Finding that perfect asset allocation is a bit of the holy grail in the investing world, so save yourself the search and take advantage of the work already done by the experts.

Things to watch out for

  • Rebalancing. If you decide to use this hack, then you also have to be sure you’re rebalancing periodically — at least once a year, you need to check in to make sure your percentages haven’t gotten too far out of whack. If you’re lucky, your account will allow you to automatically rebalance instead of having to do the math, but either way, this is how you take advantage of buying low and selling high.
  • Taxes. If you’re using this hack in a non-retirement account, then any time you do rebalance, you’ll likely be incurring capital gains and/or losses. Not to discourage rebalancing, but just be aware of the potential tax consequences if you’re making big shifts.
  • Adjusting for risk. One of the benefits of just choosing a Target Date Fund is that it automatically shifts the investments toward a more conservative mix as your retirement date draws nearer, so you’ll be on the hook for that with this strategy. Every five years or so, check back with the mix of your original fund to see what changes you need to make when you rebalance.